I had three commercial RE brokers I interviewed about a prospective sale of the rooming house. This was a education for me that reaffirmed some of which folks have said here. Here are the main things I learned:

1) The market for commercial real estate is separate and distinct from others and has its own independent dynamics. It does not move in tandem with other markets.

2) The number of market participants is smaller but is nationwide. Everything is strictly based off of the numbers and whether there can be any value add.

3) My local area is experiencing a lot of growth and population influx thus demand for rentals is strong and will remain strong for quite some time. That means that demand for MFH homes will remain. There are many out of area investors looking to buy in my area. Buyers of rooming houses tend to be local investors which means a smaller market. Notwithstanding, the market is strong for this type of property here.

4) Cap rates for all MFH is compressed. A cap rate of 9% to 10% is what the going rate is for a rooming house in my area. Regular MFH rates are slightly lower in the range of 5 to 10% depending on the area.

5) Investors are looking for value add type properties rather than turnkey. One realtor said they have difficulty selling turnkey properties with no value add potential.

6) It's critical in this business to develop relationships with commercial RE brokers, particularly when it comes to MFH. One broker pushed me to give them an exclusive for a couple of weeks to push my place "off market" to folks they knew. Many of these sales never see the light of day, particularly given current market conditions. I need to be in the "off market" network as well. In addition, these guys are a source of "market intelligence". I'll be working to develop those relationships.

Interesting.

In my part of the world, suppose a mfh has 10 units that rent for $1000/month each. The selling price is 10 x $1000 x 12 (months) x 10 (years) = $1.2 million, or something roughly in that area.

I always thought that was a bit ambitious/unrealistic, because it took into account no vacancies/expenses/upkeep, and perhaps that was why it was sitting unsold. But it was also equally feasible that mfh gets priced in very different ways from how sfh gets priced, and it sells at a very different pace.

When your agents were discussing pricing strategies, did they have a similar formula, or was it more tied to other factors?

Deanna,

I have a house with a detached garage apartment in the back. Can I use that same logic (income approach) to sell my residential property? I sure hope so.

Very interesting synopsis

Deanna, after giving them a tour and a P&L, discussions centered on the numbers, market conditions and cap rates. There was no discussion about strategy per se. Basically, selling a commercial MFH is like selling a business.

After talking with them, I came up with my own strategy to drive up NOI. I'll be installing gas furnaces to replace electric baseboard this summer.

6x6 - Cap rate, or capitalization rate is a rough idea of the rate of return you can expect. Divide net annual income by purchase price. So a $100k property that nets $10k has a 10% cap rate.

I posted last summer - "The only people who buy mut fams are other cheapskate landlords!" I had people low balling 100k under asking on a $295k property. Just ridiculous offers, then we fell out of escrow three times due to buyer scheanigans. We seized one 10k deposit for damages when they didn't cancel until AFTER the contingency period.

I will not buy another multi. Also will not consider 1031 contingencies. They are all fooling around and you get the short straw.

Single family homes are the best IMHO. Buy wholesale, rent, then sell retail. Can't do that with multis.

I prefer not only MFH but specifically commercial MFH (more than 5 units). The main difference between a SFH and a commercial MFH is how they're valued. The latter is valued on the net operating income and if you increase that by managing the business better, you can force more value. For example, I plan on keeping the rooming house for now and installing a gas furnace to replace electric baseboard. I expect to cut my electric bill by 5000 annually. At a 10% cap, I'll increase the value of the property by $ 50,000. My investment to do that will be roughly $15,000, so I'll realize a 300% return on the money so it's a no brainer to do that. That is unique to commercial MFH. That same money put into a SFH would likely not generate the same return as they're valued with comparable sales not the income they produce.

As LTD says, the market for MFH is smaller and limited to investors. They're dispassionate and are focused on return. It's very much like buying or selling a business. Although I will not rule out SFH's, my preference is commercial MFH as they've allowed me to scale quickly having come late to the game. Also, I like the business aspect of it in the sense that I now seek the turnaround situation.

My preference doesn't mean that investing in SFH or smaller MFH doesn't work though. It gets down to preference. There's no one way to make money in this business.

"Buy wholesale, rent, then sell retail. Can't do that with multis."

Deanna,

RayNPa, thanks! I knew there was a term for it, but I'd blanked on what it was called.